Dear Mayor and Council Members,
On behalf of City Manager Ed Shikada, please see staff responses below for questions from Council Member Tanaka on the Monday, October 7 Council Meeting.
Item 9: Authorize the City Manager or their Designee to Exercise the Option to Renew the Lease Between the City of Palo Alto and Steve Nash and Dennis Ryan for 4 Months at 975 Terra Bella Ave in Mountain View at a Monthly Rent of $35,587.95 for a Total Not-to-Exceed of $213,527.70 through February 28, 2025; Direct Staff to Explore Purchase of Property to Meet the Future Needs of Grid Modernization and Other Capital Projects; and Approval of an Amendment to Fiscal Year 2025 Budget Appropriation in the Electric Fund; CEQA Status – Categorically Exempt; Sec. 15301.
1. Given the current volatility of real estate prices in the Bay Area, has the city conducted a thorough risk assessment of how delaying the purchase of 975 Terra Bella could result in significantly higher future costs or the potential loss of the property to another buyer? Furthermore, how does this short-term lease renewal align with our long-term financial strategy when property values are predicted to increase, possibly outpacing the savings from leasing and ultimately forcing the city into a more expensive lease or purchase arrangement later?
Staff response: 975 Terra Bella has been on the market for over 2 years. Under the lease agreement, the City has the option to purchase the property at a mutually agreeable price.
The City also has the first right of refusal if another buyer offers to purchase the property, the City has 10 days to purchase the property under the same terms. The short term lease renewal will allow Staff the time necessary to perform property appraisal, construction cost estimate to make the office ADA compliant, negotiate the purchasing cost and seek council approval on the purchase amount and evaluate other commercial properties.
2. With property values in Mountain View rising unpredictably, how has the city factored in the financial risks of delaying a decision to purchase 975 Terra Bella? Specifically, what contingency measures are in place if property prices rise beyond our current projections, and how would such an increase affect our overall budget and operational costs? Is the city prepared for the potential of overpaying for a property that could have been secured at a lower cost, or worse, losing access to this critical storage site? Staff response: Staff needs time to perform our due diligence before we make a purchase offer. Staff has hired land appraisers to estimate the as-is market value of the property. The existing offices on the property have been deemed as non-ADA compliant and non- permissible for use. Staff needs to obtain construction cost estimates for rehabilitation or building of a new office. Staff has factored in the purchase of 975 Terra Bella into the FY
2026 Electric budget and rate forecasts. Staff is also considering including the property purchase as part of the grid modernization debt financing plan.
3. The staff report mentions the risk of increased contractor pass-through costs if the city does not secure a permanent laydown yard but fails to detail any strategies to mitigate these rising costs during the lease period. How does the city plan to manage the financial impact of this ongoing reliance on external contractors, and what steps are being taken to reduce the long-term operational inefficiencies that come with outsourcing storage needs rather than securing a stable, owned facility?
Staff response: The Geng Road site has been an ideal laydown yard due to its proximity to the MSC and low leasing costs. Staff has been exploring a permanent laydown yard for the past several years including rezoning unused open space land and building a laydown yard at a substation. Since vacant commercial properties in Palo Alto are scarce and expensive, staff is also evaluating properties outside of Palo Alto.
Item 15: Approval of Amendment via Change Order to Contract Number C22183580 with MP Nexlevel of California, Inc. in the Amount of $1,650,000 for the Fiber-to-the-Premise (FTTP) Pilot Project inclusive of $150,000 in contingency funding for a Revised Total Not-to-Exceed Amount of $11,347,390 From March 21, 2022 Through April 30, 2025; Authorize the City Manager to Execute Change Orders Not-to-Exceed $150,000 for FTTP ; CEQA Status – Council action on this item is within the scope of the Final Initial Study and Mitigated Negative Declaration (IS/MND) for the Fiber-to-the-Premises Project, adopted on June 17, 2024.
1. Considering the upfront financial commitment, what specific data or projections demonstrate the expected adoption rate of this fiber network, and how has the city calculated the break-even point? If the adoption rate is significantly lower than anticipated, what alternative strategies are in place to ensure this investment doesn't become a long-term financial burden on the city budget? Staff response: Based on the citywide broadband survey, the projected take rate or subscription of Palo Alto Fiber ISP is between 37% - 42%. The minimum take rate for revenues to exceed expenses is between 25% - 30%. Council adopted a phased approach using fiber reserves without debt financing. The pilot allows the City to build expertise on construction and providing the new ISP service. We have the flexibility to modify our approach in subsequent phases. If the adoption rate is significantly low, the City can invest more in sales and marketing; improve time to market; rescope the buildout; and/or reduce planned expenditures.
2. Given the rapid advancements in technologies like 5G and satellite internet, how has the city ensured that this investment in fiber will remain relevant and competitive over the next 10 to 20 years? What provisions have been included to allow the city to pivot or adapt if future technologies outpace fiber in terms of cost, speed, or reliability, preventing this project from becoming outdated?
Staff response: The City is building a new fiber backbone with 432 counts of fiber compared to 144 count in the existing backbone. Of the 432 fiber count, we have approximately 150 spare fiber for future City needs or leasing services. The fiber network architecture is scalable requiring only equipment upgrades.
3. While the focus has been on the initial construction costs, what specific projections have been made regarding long-term maintenance and operational expenses for the fiber network? How will the city ensure that these ongoing costs are covered, especially if revenue from subscriptions falls short of expectations? What is the plan if the city is forced to allocate additional funds in the future to sustain this network? Staff response: The City has developed a 10 year proforma which includes operating, maintenance, and replacement costs (i.e. staffing, data center, vehicle, software, legal, marketing, administrative). With the phased construction and outsourcing approach, the City has the flexibility to accelerate or decelerate the FTTP build out. After the pilot, staff will return to Council with key metrics such as take rate, cost per passing, and customer satisfaction along with funding options for subsequent phases.